PV segment to witness 4-7% decline in FY2020

The auto industry, which has already registered de-growth of 21.6 per cent in the first four months (4M) of fiscal year 2019-20 (FY2020), may get some support from the recently announced stimulus measures by the government, says ICRA.

The Indian automotive sector is likely to witness decline across segments in during FY2020 due to the slow down across the board in the industry, some of which have continued from FY2019 and intensified in FY2020. The sharp decline across segments - including a 21.6 per cent decline in the passenger vehicle (PV) segment and 24.1 per cent decline in M&HCV Truck segment - during the first 4 month of FY2020 is likely to impact the industry’s full year volume growth and performance. The prevailing condition in the user OEM will also lead to contraction of growth and margins in the auto component industry.

As per ICRA’s analysis of the auto sector, the likely decline in passenger vehicles and M&HCV Trucks are estimated to be in the range of 4-7 per cent and 0-5 per cent, respectively in FY2020. Subrata Ray, Senior Group Vice President, ICRA, said, “In the short-term, much would depend on the meaningful demand recovery post monsoons, especially given the fact that many parts of the country have witnessed flooding. Agricultural output, revival in economic and industrial growth would be critical. It, however, remains to be seen how the auto demand recovers during the festive season and likely pre-buying in Q4 FY2020, in anticipation of post BS VI price hikes.”

Government’s stimulus push

Since the beginning of Q2 FY’19, the auto industry has been grappling with tough time and growth has slowed down. To mitigate the impact of sluggish growth, the Finance Minister Nirmala Sitharaman announced a slew of measures ranging from tax sops to ease of doing business for boosting growth and stabilise economy. As per ICRA, the recent announcements by the government will provide succor for the sector. The commitment from the government regarding validity of registration of BS IV vehicles till their registration period will provide comfort to customer. Further, initiatives like deferment in hike in registration tax till June 2020, release of GST refund within 30 days to ease liquidity pressure – especially for MSMEs, doubling of depreciation rate to 30 per cent from 15 per cent on new vehicles purchased till March 2020 and; infusion of liquidity in banking system and passing on lower interest cost benefits will ease liquidity pressure at dealerships (the most vulnerable segment in the value chain).

Subrata Ray said, “The recent steps announced by the Government is a positive for the sector. The liquidity support announced for the banking system and Government spend on infrastructure can be a significant catalyst for the automotive industry. In the long-term the demand drivers would be increasing disposable income, poor public transport infrastructure and increasing financing penetration in India, especially in urban and semi-urban areas.”

Stable outlook

Segment-wise, the commercial
vehicles (CV) segment is expected to grow by 1-2 per cent in volume terms. Within this, the M&HCVs (Trucks)
will be 0 to -5 per cent, LCV may
post 0 to 2 per cent growth and buses 4-6 per cent. As for two wheelers, it being no exception, growth will be contingent upon the introduction of
BS VI across all models from April 1, 2020 which will lead to price increases across the industry.

ICRA estimates the industry capex expenditure to be around Rs 50-60 billion to be largely incurred towards upgradation of existing platforms, new models and BS VI. The outlook for the industry is stable. Going forward, credit profile of most OEMs will continue to remain stable owing to modest leverage and strong liquidity position.

The recent steps announced by the Government is a positive for the sector. The liquidity support announced for the banking system and Government spend on infrastructure can be a significant catalyst for the automotive industry.
Subrata Ray, Senior Group Vice President, ICRA